We remain optimistic about the outlook for gold and gold stocks in the near term. Gold companies continue to exhibit, we believe, truly compelling fundamentals and valuations. Gold stocks generally remain in good shape and should be able to navigate a recovery, despite potential impacts on operations from the coronavirus pandemic in the near term.
There are two main reasons why gold has been under pressure. First, institutional investors have unwound hedged positions in risk parity and other volatility-strategy portfolios. Second, other investors have sold gold to raise cash to meet margin calls to cover losses. This is commonplace during market sell-offs. Collateral and liquidity have been sought at all costs.
Lessons from history
History has shown that stock markets eventually recover. And indeed, gold and gold stocks have tended to recover faster than the broader markets following crises, as seen in 2008 post-GFC and other previous market crises.
In 2007 our currency, buoyed by relatively high-interest rates, bought as high as US$0.9786. In the immediate aftermath of the GFC it finished 2009 at 0.8969. Prior to this current market-correction, at the start of the year the Australian dollar was buying US$0.7003 and is now hovering near US$0.6000.
During the GFC, gold and gold stocks bottomed and recovered much earlier than the US market benchmark, the S&P 500, recouping losses at around the time the S&P 500 reached its lows in February to March 2009. You can see this is chart 1. The S&P 500 took nearly two years to reach its pre-crisis levels again. Gold stocks recovered a lot more quickly, as the chart below highlights. It’s important to note that chart 1 is all in US dollars.
Chart 1: Gold bullion and gold stocks recovered before S&P 500 during 2008 financial crisis
Source: VanEck, Bloomberg. All returns in US dollars. “S&P 500” represented by the S&P 500 Index TR. “Gold stocks” represented by the NYSE Arca Gold Miners Index Net Total Return. “Gold” represented by gold spot prices.
Looking at the Australian experience in 2008, our market recovered faster than the US. This is shown in chart 2. Chart 2 is in Australian dollars and assumes all exposures to gold and gold stocks are unhedged. You can see during the Australian share market recovery that gold bullion, in Australian dollar terms, held up particularly well and gold stocks tracked the experience of the US with a V-shaped recovery.
Chart 2: Gold and gold stocks recovered before S&P/ASX 200 during 2008 financial crisis
Source: VanEck, Bloomberg, Morningstar. All returns in Australian dollars. “S&P/ASX 200” represented by the S&P 500/ASX 200 Accumulation Index TR. “Gold stocks” represented by the NYSE Arca Gold Miners Index Net Total Return. “Gold” represented by gold spot prices.
During this pandemic, companies are taking all precautions to continue running their businesses. Although we anticipate that some operations will be impacted, discussions we have had with companies indicate that every effort is being made to ensure inventories, supply lines, employee health and back-up redundancies are in place to sustain production.
We expect limited to no credit problems in the gold mining sector. The lengths to which gold miners have gone to reduce costs and capital expenditures and to avoid mistakes of the past could translate to an additional near 40 per cent increase in free cash flow, on average, if the gold price moves from US$1,600 to US$1,800 (for senior and mid-tier miners).
Estimated free cash flow for gold price moves
Source: VanEck, Bloomberg. Data as of March 2020. “Senior” miners defined by production levels of approximately 1.5 to 6.0 million ounces of gold per year (“mid-tier” approximately 0.3 to 1.5 million ounces per year).
Exchange-trraded Funds (ETFs) may provide access for investors looking to get exposure to gold bullion and gold miners in their portfolios as a source of defence and diversification.
The average daily turnover of, the world’s largest gold miners ETF, the VanEck Vectors Gold Miners ETF GDX on NYSE in March was in excess of US$2.5 billion. Similar investing trends have emerged for GDX on the ASX as investors seek the safety of gold and gold equities. Gold bullion and gold miners ETFs listed on ASX have raised approximately $340 million since the beginning of February to 31 March with no sign of abating.
Arian Neiron, managing director and head of Asia Pacific, VanEck
IMPORTANT NOTICE: This information is issued by VanEck Investments Limited ABN 22 146 596 116 AFSL 416755 as responsible entity of VanEck Vectors Gold Miners ETF (“fund”). Nothing in this content is a solicitation to buy or an offer to sell shares of any investment in any jurisdiction including where the offer or solicitation would be unlawful under the securities laws of such jurisdiction. This information contains general advice only about financial products and is not personal advice. It does not take into account any person’s individual objectives, financial situation or needs. Before making an investment decision you should read the applicable PDS available at www.vaneck.com.au or by calling 1300 68 38 37 and with the assistance of a financial adviser consider if it is appropriate for your circumstances. The fund is subject to investment risk, including possible loss of capital invested. Past performance is not a reliable indicator of future performance. No member of the VanEck group of companies gives any guarantee or assurance as to the repayment of capital, the payment of income, the performance, or any particular rate of return from the fund.
